Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently involve the enrichment of the firm's executives or managers (in the form of money and perquisites or power and prestige) at the expense of the company's shareholders. This usurping and reallocation of shareholder wealth is most likely to occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management. Consider the following scenario and determine whether an agency conflict exists: Alexander owns Alexander's Tantalizing Tees, a T-shirt shop in a small college town in Georgia. With a staff of three part-time employees, Alexander operates the business in accordance with his personal goals, dreams, and capabilities. Does Alexander have an agency conflict to deal with? O No; by having part-time, as opposed to full-time, employees, Alexander is prevented from experiencing an agency conflict. O No; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has not created the necessary agency relationship through which an agency conflict can exist.
Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently involve the enrichment of the firm's executives or managers (in the form of money and perquisites or power and prestige) at the expense of the company's shareholders. This usurping and reallocation of shareholder wealth is most likely to occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management. Consider the following scenario and determine whether an agency conflict exists: Alexander owns Alexander's Tantalizing Tees, a T-shirt shop in a small college town in Georgia. With a staff of three part-time employees, Alexander operates the business in accordance with his personal goals, dreams, and capabilities. Does Alexander have an agency conflict to deal with? O No; by having part-time, as opposed to full-time, employees, Alexander is prevented from experiencing an agency conflict. O No; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has not created the necessary agency relationship through which an agency conflict can exist.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:7. Agency conflicts between managers and shareholders
Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her
principal. In large corporations, these conflicts most frequently involve the enrichment of the firm's executives or managers (in the form of money and
perquisites or power and prestige) at the expense of the company's shareholders. This usurping and reallocation of shareholder wealth is most likely to
occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management.
Consider the following scenario and determine whether an agency conflict exists:
Alexander owns Alexander's Tantalizing Tees, a T-shirt shop in a small college town in Georgia. With a staff of three part-time
employees, Alexander operates the business in accordance with his personal goals, dreams, and capabilities.
Does Alexander have an agency conflict to deal with?
O No; by having part-time, as opposed to full-time, employees, Alexander is prevented from experiencing an agency conflict.
O No; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has not created the necessary agency relationship through
which an agency conflict can exist.
O Yes; as both the owner and operator of Alexander's Tantalizing Tees, Alexander has created the necessary agency relationship through
which an agency conflict can exist.
O Yes; there is always an inherent conflict of interest between owners and operators (managers).
Transcribed Image Text:For the past 40 years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These
compensation packages have also been intended to reduce potential agency conflicts between these managers and the firm's shareholders.
In the best interest of shareholders, compensation packages should be structured in a way such that managers have an incentive to maximize the
v value of the company's common stock price.
In addition to well-designed executive compensation packages, two other motivational forces can align the interests of managers with those of their
shareholders. Which of the following actions could be used to reduce the potential for these agency conflicts and ensure that the firm's managers will
pursue the long-term wealth interests of their shareholders?
O Let the manager know that a takeover is possible if he or she doesn't perform well.
O Let the manager know that he or she will be fired if the company's stock does not reach a certain target by the end of the year.
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